Inflation last year halved from 2014 level

CPI:The country experienced the lowest annual inflation rate last year since 2009.

As the price of crude oil globally dipped to an all time low in 2015, the country recorded an average annual inflation of 4.52 percent last year, from 8.27 percent in 2014 and 8.77 percent in 2013.

However, the year-on-year inflation, or the price of goods and services between December 2014 and December 2015 increased by 3.45 percent. This was 0.14 percentage point lesser than the previous month, meaning between November 2014 and November last year, price of goods and services increased by 3.59 percent.

The highest ever inflation (year-on-year) recorded this year was in February at 6.32 percent, from where it gradually fell 3.10 in August, the lowest.

Fuel price, which was revised more than 20 times, 17 being drop in price last year, has been the main contributor to the low inflation rate.

Fuel being a price inelastic good, fluctuations in fuel price will have major impact in determining inflation. In other words, fuel price variation is not likely to cut the aggregate demand in the economy.

The plummeting fuel price, from economic perspective, should lead to cheaper transportation, which in turns cuts the price of consumer goods.

However, as fuel price dropped, the consumer price index this year recorded a disinflationary trend for some time. In particular, fuel price in the months of August, September and October last year has at least decreased by six percent comparing with same months in 2014. Even as of December last year, it decreased by almost three percent.

Economists also claim that inflation is sometimes seasonal. For instance, the price of vegetable shoots up when the farming season is off. Between July 2014 and July last year, price of vegetables increased by a meagre 1.6 percent and in December, it increased to 6.11 percent.

Another economist said the fluctuation in exchange rate between INR and USD could also affect inflation. This was because, when USD appreciates against the INR, Indian firms acquiring goods from third countries end up paying more. The increase in expenditure that Indian companies bore is then transferred to consumers, including Bhutanese.

On the food basket, an economist said lack of proper supply chain, storage facility, increasing cost of production and uncontrolled rural wages could be probable factors that Bhutan need to work on to control inflation.

This could drive the cost-push inflation, which occurs when prices of production inputs increase. While the current inflation rate is adequate for the economy, he said it was all because of the fuel price. “Otherwise there aren’t other mechanisms to control inflation apart from monetary polices,” he said.

Another noteworthy trend this year is that domestic inflation has overtaken imported. In December, the prices of domestic goods and services increased by 4.28 percent and imported by 2.68 percent.

Likewise in November, prices of imported goods increased by 2.69 percent and domestic goods increased by 4.60 percent. This means that more than 60 percent of the inflation is homegrown. Even in October, the trend is similar.

On imported inflation trailing below domestic inflation, local economists are pointing towards the Wholesale Price Index (WPI) in India that has now been deflating for 14 consecutive months.

WPI represents the price of goods at a wholesale stage, where goods are sold in bulk and traded between organizations instead of consumers. Being an exporter country, WPI is an important measure of inflation in India. But from the consumers’ perspective, inflation has been lingering around five percent in India as well.

Indian media reports maintain that this deflationary trend on WPI could come to an end, which indicate that imported inflation in the country could rise because the country imports more than 80 percent of goods from India and most transactions take place at wholesale or retail stage.